Market Turmoil Prompts New Speculation on the Fed’s Timetable

William C. Dudley, the influential president of the Federal Reserve Bank of New York, said the case for a September hike had become “less compelling.”Credit
Eduardo Munoz/Reuters

WASHINGTON — Turmoil in global financial markets has reduced the chances the Federal Reserve will raise its benchmark interest rate in September, a senior Fed policy maker said on Wednesday, but the possibility of a rate increase remains on the table, provided markets regain balance and economic problems in other countries do not disrupt the slow but steady performance of the domestic economy.

William C. Dudley, the influential president of the Federal Reserve Bank of New York, said at a news conference in New York that the case for raising interest rates had become “less compelling” in recent weeks.

It was the first public indication that Fed officials had been rattled by recent market turbulence, which had already led many investors to conclude the Fed would wait a little longer before raising rates.

“From my perspective, at this moment, the decision to begin the normalization process at the September F.O.M.C. meeting seems less compelling to me than it was a few weeks ago,” Mr. Dudley said, referring to the next meeting of the Federal Open Market Committee, which sets monetary policy.

Even if the Fed hesitates, Mr. Dudley said he would hope to move later this year, at a subsequent meeting in October or December. He has emphasized previously that he does not want the timing of a move to come as a surprise for investors.

“Normalization could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing and more information on international and financial market developments, all of which are important in shaping the U.S. economic outlook,” Mr. Dudley said.

For all the hedging in Mr. Dudley’s comments, some analysts saw them as confirmation the Fed is unlikely to move at its meeting next month, scheduled for Sept. 16 and 17. Market-based measures of investor expectations, which have fallen alongside the stock market, already put the odds of a September rate increase at just 24 percent Wednesday.

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Fed’s Dudley on Rate Decision

William C. Dudley, president of the Federal Reserve Bank of New York, discussed on Wednesday the factors that would help the Fed determine when to raise its target interest rate.

“The odds of a September rate hike have just dropped further, and we have to push our forecast for the first move to December,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, told clients Wednesday afternoon. “A massive payroll number next week, coupled with strength in August auto sales, retail sales and the ISM surveys, could yet persuade the Fed to move, but markets would have to rebound significantly too, and this all seems a bit too much to ask.”

But Michael Feroli, chief United States economist at JPMorgan Chase, said in an email on Wednesday that he still saw a real chance for a September increase, provided markets behaved and the domestic economy continued to show strength.

“I do think he left the door open to September just a tad, which makes sense given that markets and payrolls can surprise in a bunch of ways,” Mr. Feroli said.

The Fed is marching toward higher rates because officials are concerned the economy will eventually overdose on easy money. While recovery from the recession remains incomplete, monetary policy works slowly, and the Fed is wary of the risk that the economy will overheat in coming years. The unemployment rate stood at 5.3 percent in July, and policy makers at the central bank are hesitant to push it much below 5 percent.

The government reported Wednesday that orders for durable goods rose 2 percent in July, the latest in a string of positive data. Analysts expect the government on Thursday to raise its estimate of second-quarter gross domestic product.

But an economic slowdown in China, and that government’s troubled response, have buffeted global financial markets in recent weeks, driving down equity prices, contributing to a new round of declines in the prices of oil and other commodities, and sending a rush of money into safe assets like United States Treasury securities.

Some developments, like lower oil prices, will benefit American consumers. Others, like the decline of stock prices, are erasing wealth that might have been spent.

The question confronting Fed officials is whether they are sufficiently confident about the resilience of domestic growth to raise interest rates.

Stanley Fischer, the Fed’s vice chairman, is scheduled to speak Saturday at an annual conference for monetary policy makers in Jackson Hole, Wyo. Other Fed officials also plan to attend the gathering, where the impact of recent market developments will certainly be a major topic of discussion.

Even as Mr. Dudley suggested a September rate increase was less likely, he cautioned on Wednesday against assuming the Fed would significantly alter its plans. He dismissed the possibility of a new round of stimulus.

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“It’s important not to overreact to short-term market developments because it’s unclear whether thiswill just be a temporary adjustment or something more persistent that will have implications for the U.S. growth and inflation outlook,” Mr. Dudley said.

But the Fed might decide to wait a little longer. Markets have not found their balance, and Mr. Dudley noted that it was too soon to gauge the impact of the market downturn in broader indicators. The government, for example, will release next week a report on August job growth based on a survey conducted earlier in the month.

William Lee, the head of North American economics at Citigroup, described Mr. Dudley’s remarks as careful and balanced. If the market downturn continues, and broadens, Mr. Lee said he would expect the Fed to delay raising rates. If markets find their balance, he said he still expected the Fed to move in September.

“It’s a little more violent than people would like,” Mr. Lee said of the market correction. “It’s bigger than people would like. But is it surprising? It shouldn’t be.”

More important, he said, was the continued strength of domestic economic data.

But Tim Duy, an economist at the University of Oregon and a close Fed watcher, said that the Fed, in effect, was already tightening domestic financial conditions by standing still while central banks in other countries, including China, were racing to stimulate their economies. Raising domestic interest rates under those conditions, he said, would be “too much, too fast.”

Correction: August 26, 2015
Because of an editing error, an earlier version of this article misstated where Mr. Dudley held a news conference. It was in New York, not Buffalo.

A version of this article appears in print on August 27, 2015, on Page B1 of the New York edition with the headline: Market Turmoil Prompts New Speculation on the Fed’s Timetable. Order Reprints|Today's Paper|Subscribe